Opinion analysis: If the agreement governs, the agreement governs
on Apr 19, 2013 at 10:35 am
On Tuesday, the Court issued a split decision in U.S. Airways, Inc. v. McCutchen, handing a partial victory to each side. As discussed in our preview, McCutchen involves a provision of the Employee Retirement Income Security Act (ERISA) that allows a health plan administrator to file a lawsuit seeking “appropriate equitable relief . . . to enforce . . . the terms of the plan.” In this case, a plan administrator (U.S. Airways) sought to enforce contractual language requiring a covered employee to reimburse the plan for paid medical expenses if the employee later recovers monetary damages from a third party. The question before the Court was whether a defendant in such a suit (i.e., the employee) may assert equitable defenses based on principles of unjust enrichment, or whether the defendant is instead bound by the plan’s express reimbursement terms.
In an opinion authored by Justice Kagan and joined by Justices Kennedy, Ginsburg, Breyer, and Sotomayor, the Court held that unjust enrichment principles cannot override the plain terms of a plan in cases like this. However, the majority further concluded that one particular equitable rule – the common-fund doctrine – plays a role in the interpretation of a plan that does not specifically address the allocation of attorney’s fees. Justice Scalia, joined by the Chief Justice and Justices Thomas and Alito, dissented from this latter aspect of the Court’s holding, but did so on procedural grounds only.
The employee in this case, James McCutchen, sought to rely on two separate equitable doctrines as defenses to the airline’s reimbursement claim. First, he argued that at equity, an insurer was permitted to recoup only those funds representing the insured’s “double recovery” – i.e., the amount recovered from a third party to compensate for the same loss that was covered by the insurance. That rule would make a significant difference in this case because it would limit the airline’s reimbursement to the portion of McCutchen’s settlement intended to cover his medical expenses; it would exclude damages for other injuries, such as loss of future earnings or pain and suffering. Second, McCutchen argued that the airline’s reimbursement should be reduced under the common-fund doctrine, which provides that a litigant who secures a fund benefitting other persons is entitled to recover a reasonable portion of his attorney’s fees from the fund itself.
These arguments, the Court held, were “doom[ed]” by the logic of its prior decision in Sereboff v. Mid Atlantic Medical Services, Inc. In that case, the Court held that an insurer could bring a reimbursement claim under Section 502(a)(3) of ERISA – the same provision at issue here – because the claim sought to enforce a “lien based on agreement.” The Sereboff Court rejected the defendants’ argument that the plan’s terms were trumped by various equitable defenses that would apply to a freestanding claim for subrogation. Such defenses were “beside the point,” the Court held, because the lien that the insurer sought to enforce derived not from equitable subrogation principles, but from the agreement itself. Here, the Court concluded that Sereboff’s reasoning undermined McCutchen’s arguments because, like the Sereboff defendants, he was attempting to “rely on theories of unjust enrichment to defeat US Airways’ appeal to the plan’s clear terms.” He could not do so, the Court concluded, because enforcing an agreement-based lien “means holding the parties to their mutual promises.”
Nor was the Court persuaded by the argument made by the government (which appeared as an amicus) that a different rule should apply in the context of the common- fund doctrine. “[I]f the agreement governs,” the Court reasoned, “the agreement governs.” While recognizing that the common-fund doctrine “has deep roots in equity,” the Court concluded that “if a contract abrogates the common-fund doctrine, the insurer is not unjustly enriched by claiming the benefit of its bargain.”
Yet, while rejecting the notion that equitable rules can override the language of a plan, the Court concluded that “they still might aid in properly construing it.” In this case, the plan’s reimbursement provision clearly foreclosed the application of the double-recovery rule because it gives U.S. Airways first claim on any recovery from a third party. As to the allocation of attorney’s fees, however, the majority determined that the plan was silent. That is, it could be read either to give the airline first dibs “on every dollar received from a third party, even those covering the beneficiary’s litigation costs,” or to limit that right “to only the true recovery, after the costs of obtaining it are deducted.”
Under such circumstances, the majority held, “the common-fund doctrine provides the best indication of the parties’ intent.” Noting the doctrine’s deep historical roots, the Court concluded that “[a] party would not typically expect or intend a plan saying nothing about attorney’s fees to abrogate so strong and uniform a background rule. And that means a court should be loath to read such a plan in that way.” This default rule, the Court explained, is “reinforce[d]” by the equitable principles underlying the common-fund doctrine, which exists to prevent nonparties from free riding on benefits obtained by a litigant. The majority believed that the fairness rationale applies with particular force in cases like this one, in which “the beneficiary is made worse off by pursuing a third party.” In this case, McCutchen’s net recovery after the payment of a forty-percent contingency fee to his attorneys was $66,000 – i.e., less than the $66,866 in medical expenses claimed by U.S. Airways. Foreclosing the common-fund rule would mean that McCutchen “in effect . . . [paid] for the privilege of serving as US Airways’ collection agent.” In the majority’s view, “McCutchen would not have foreseen that result when he signed on to the plan.” The Court accordingly vacated the judgment below and remanded the case for further proceedings.
Justice Scalia’s dissent is brief and does not contest the merits of the majority’s ruling on the common-fund question. Rather, the dissenters argue that the majority should not have reached that issue because the Court “granted certiorari on a question that presumed the contract’s terms were unambiguous,” including with respect to the allocation of attorney’s fees. The dissent further contends that McCutchen conceded that the terms of the plan require “full reimbursement,” without any contribution by the airline to attorney’s fees and expenses. Therefore, the dissent argues, “[t]he Court . . . has no business deploying against petitioner an argument that was neither preserved . . . nor fairly included within the question presented.”